Step 1: Calculate the adjusted average debt

Broadly, the adjusted average debt of a non-ADI financial inward investment vehicle is the debt capital used in its Australian operations that gives rise to debt deductions. It does not matter whether the debt deductions arise in the year the debt interest was issued or in any other income year.

Debt that does not give rise to any deductible expenditure at any time is generally not included in adjusted average debt. However, it is included if the debt interest is cost-free debt capital – see step 1.4.

The adjusted average debt also includes assets that comprise securities loan arrangement amounts where those amounts do not otherwise qualify as debt interests – see step 1.3.

The entity's debt capital is the average value of all the debt interests issued by the entity that give rise to debt deductions in any year of income. This includes debt interests that do not initially give rise to debt deductions but will do so in the future

Step 1.2: Calculate the average value, for that year, of all the entity's associate entity debt.

The amounts included in an entity's borrowed securities amount are explained in Borrowed securities amount. Broadly, they include the entity's liabilities incurred under a repurchase agreement, sell-buy-back arrangement or securities loan arrangement

Step 1.4: Calculate the average value, for that year, of any of the entity's cost-free debt capital.

If the adjusted average debt is zero or a negative amount, the entity has not exceeded its maximum allowable debt and it is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any further calculations.

If adjusted average debt is a positive amount, you need to calculate the entity's maximum allowable debt amount, which is the greater of the:

safe harbour debt amount – steps 2 and 3

arm's length debt amount – step 4

worldwide gearing amount – step 5.

See also:

Worked example of calculations for a non-ADI financial inward investment vehicle.

How to do the first step of your calculations to check if you meet the requirements under the thin capitalisation rules if you are a non-ADI financial inward investment vehicle.

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